Back taxes, underwater mortgage add to credit worries

Originally published October 27, 2012 at 8:00 pm
Updated October 27, 2012 at 10:01 pm

Christopher Conen says his financial situation has been what he calls “a constant, nagging concern. ” In March, after a chronic back injury laid Conen out for several weeks, he hit the breaking point so he thought it was time to get some help.

When it comes to helping out his friends, Christopher Conen, of Seattle, is a pay-it-forward kind of guy.

When it comes to giving Uncle Sam two years’ worth of missed tax returns, he’s trying to get in pay-it-back mode.

Conen, 55, says he wanted to file a federal income-tax return but didn’t have the $2,000 he thinks he likely owed the Internal Revenue Service in 2009 and 2010. Financial ups and downs over nearly 15 years left him among what the IRS website reports is an estimated 17 percent of Americans who fail to file in any given year for a variety of reasons.

Now, his abstention and the potential consequences are what he calls “a constant, nagging concern.”

Between any IRS penalties and $30,000 in credit-card debts, he says, “I’m scared that I’m going to be financially wiped out.”

Opting not to file taxes wasn’t something he took lightly, Conen says. It came after his finances took a series of corkscrew twists dating back 20 years.

After Conen was caught in the riptide of high-tech workers laid off during the national dot-com bust in the 1990s, he was able to keep his first house (a 600-square-foot Delridge-area place) and to sell a rental house in Kent.

“But when I lost that job,” Conen says, “ I knew that with my age and history of pay, it was going to be tough finding something else right away.”

He opted to turn the Delridge house into a rental when a friend took him in as a rent-free roommate until Conen could get back on his financial feet. With his friend’s kindness as a safety net, Conen cobbled together income as a handyman and used that same sweat labor to refurbish a dilapidated house in Everett in 2001.

The effort “pushed my credit cards near to max just making it sellable to a different investor” but “I still lost my shirt.”

At about the same time, he found that tenants in his Delridge house had “destroyed the place.”

Now working in telecom again, Conen moved back to Delridge to salvage his first house “with the intention of selling after two years and using the profit to pay off my debts. However, with the market crash, I ended up stuck in it with no equity left.”

Though he was in a bad place, he recalled his friend’s generosity, so when another friend lost his job, Conen chose to “pay it forward” and took in that buddy as a rent-free roommate.

“I’d been in his exact same position,” recalls Conen. “Being able to feed him and give him a place to live felt like karmic payback.”

But good karma hasn’t caught back up with him.

“I make $40,000 a year, but due to high consumer debt I have to put medications and sometimes groceries on credit cards, which I’m paying minimums on,” according to Conen.

At the same time, he’s paying interest only on a modified variable-rate mortgage with two years before the rate could shoot sky high.

“My truck is dying, and I can’t afford to address health issues even though I have insurance,” he says. “This is all very stressful and depressing.”

In March, after a chronic back injury laid Conen out for several weeks, he hit the breaking point.

“I realized I was one small crisis away from being wiped out,” he says.

Tired of the pressure, Conen filled out an online survey to participate in a free financial makeover with a member of the Puget Sound Chapter of the Financial Planning Association.

After his first makeover meeting, chapter member and Certified Financial Planner Evan Schmidt of Kirkland-based Schmidt Financial Group had a mix of compliments, clarification and advice for Conen.

“I commended him for being brave,” says Schmidt after their first meeting. “This was not easy for him.”

Dealing with back taxes is stressful, Schmidt says, “but he did what was right: He reached out for help.

“While this is, no doubt, an intimidating situation, Christopher has an individual account that he can take penalty-free distributions from, in the event he owes back taxes,” Schmidt says. Getting to this quickly is important, he adds, because “penalties can be severe. The government takes this very seriously.”

According to federal law, willful failure to file a tax return is a misdemeanor and can be punishable by up to one year in prison for each tax year.

For back-tax payment help, Schmidt worked with Conen to craft a repayment plan — but advised him that specific questions about calculating taxes owed and negotiating with the IRS will require the help of a certified public accountant (CPA).

Next up: Start cracking down on credit-card debt. Conen’s current debt level is eating up half of his take-home income.

“(Christopher already had) created a spreadsheet to track due dates and minimum payments, which is outstanding, but he’ll need to start retiring his consumer debts in order to improve his financial situation,” Schmidt says.

The two men reviewed the debts and put together a payment plan that focused on paying off cards with the highest interest rates first.

With that plan in motion, Schmidt says, “I’d like Christopher to work with a nonprofit credit counselor to consolidate his revolving debt and possibly reduce the amount owed.”

Meanwhile, the planner advises, “he’ll need to stop using his cards.”

The benefit, Schmidt says, can help him with his mortgage, too.

“By paying down his credit cards, it will enable him to afford his mortgage,” says Schmidt. “Because he only has so much cash flow coming in, it makes sense to pay off the most expensive debt first.

“That also means he’s going to have more money for his mortgage, which is increasingly important in the future when his payments are going to increase — and that’s pretty significant.”

There’s another way Conen can address his mortgage, too.

“In 2009, Christopher was able to modify his mortgage to more favorable terms — 4.5 percent through August 2014. This is great in the near term but once the modification period ends, his payment will jump to around 40 percent of income at current interest rates,” according to Schmidt.

It’s already “outside of safe guidelines,” he adds, “but because his mortgage is adjustable there’s no assurance that it won’t jump even higher.”

The goal?

“Christopher will need to refinance at some point since he wants to stay in his home long-term,” advises Schmidt. Since the Delridge house is underwater, “he’ll need to retire his revolving debt so he can afford to make principal payments.”

As for Conen’s rent-free roommate, Schmidt believes his client’s “intentions are wonderful. He’s trying to help his friend out. … (However), charging a modest rent would be a good steppingstone” that wouldn’t violate Conen’s pay-it-forward philosophy. It could also help the roommate get back on his own feet, the planner believes, adding “We’re not talking about a lot, very suddenly, because that could be overwhelming.”

Meanwhile, Schmidt wants to connect with his client again because their work isn’t over: “It will give us an opportunity to discuss what Christopher should do once his revolving debt is retired and how he can start making regular contributions to his investment accounts again.”